Even though the Fed cut the interest rates last week for the first time since 2008, President Trump’s Twitter rhetoric hasn’t slowed down. On Thursday, he targeted the Fed for letting the US dollar stay strong by keeping the interest rates high. He added that the strong dollar is making it difficult for US manufacturers including Boeing (BA), Caterpillar (CAT), and John Deere (DE) to compete. He also added automakers to the list. Notably, the weak dollar could fuel a currency war.
Trump wants a currency war
President Trump’s tweets followed the recent weakness in the Chinese yuan. After the yuan fell to a multiyear low, the Trump administration declared China a “currency manipulator.” China has been setting the yuan weaker than the 7 mark against the US dollar.
The weak US dollar means that it costs less for foreign importers to buy US goods in their local currencies. While the weaker dollar can make US exporters more competitive, can it really help Boeing, Caterpillar, and the economy? We don’t think so. We aren’t isolating the currency factor from the ongoing trade war. President Trump’s frustration seems to be a reaction to the weak Chinese yuan.
Weaker dollar might not help Boeing
The weaker dollar would help Boeing be more competitive regarding exports. However, the argument ignores Boeing’s current problems. The company’s problems are more about market positioning and regulation than costs. Boeing commanded higher margins than Airbus before the 737 MAX crisis. Boeing can afford to engage in a price war in the short term even if the dollar is strong.
Even if the weak dollar helps Boeing, it won’t solve the company’s regulatory problems around the world. The 737 MAX planes are grounded with no resolution in sight in the near term. In fact, grounding Boeing planes impacted US airlines significantly.
Boeing might lose business from China if the trade war turns into a currency war. China has retaliated in the past by snubbing Boeing. The company can’t afford to miss doing business with the biggest aviation market in the world.
Also, the argument assumes that other countries won’t start a currency war. China has a lot of power. Overall, China isn’t afraid to take the pain.
Will the weak dollar help Caterpillar?
President Trump also mentioned Caterpillar (CAT) in his tweet. The company reported disappointing second-quarter earnings. The stock has also been under pressure in 2019. So far, Caterpillar stock has lost more than 6%.
A currency war wouldn’t help Caterpillar. The company’s Asia business, which accounts for over 20% of its total revenues, is already struggling due to the trade war. A currency war would make the situation worse. Lower interest rates might help the company’s US business—assuming businesses continue to invest. The energy sector’s outlook is already gloomy. Lower interest rates might not change much of that since the economy is already overheated. As a result, lower interest rates and a currency war might not help Caterpillar.
Could General Electric benefit?
While President Trump’s tweet didn’t mention General Electric (GE), he focused on the manufacturing and industrial sector. We can’t really ignore General Electric here, can we?
With the renewables and aviation segments taking center stage, General Electric is on a transformation path. The weak dollar and possible softness in oil prices don’t bode well for renewables. General Electric’s aviation segment is somewhat tagged to Boeing. The company manufactures engines for Boeing planes. As a result, General Electric might not benefit much from a currency war.
Deere might not win from a currency war
Deere (DE) derives a large part of its revenues from agriculture equipment. The trade war has impacted the agriculture sector the most. The situation might get worse if the trade war turns into a currency war. Countries might choose to support local alternatives to Deere, especially if nationalism continues to rise.
US economy might suffer
Most importantly, Americans will suffer from the weak dollar.
The weak dollar might force capital out of US equity markets. While lowering interest rates could fuel a rally in the S&P 500 (SPY), the weak dollar might be a spoilsport.
However, we have to consider the US consumption pattern. The US imports more than it exports. The weaker dollar will make the imports more expensive and widen the budget deficit. The weak dollar also means that your foreign vacations will get more expensive. Low interest rates and the weak dollar will also hamper savings.